Ervin Barham

This is not an eligible rollover distribution (if you are distributing only the required minimum) so the automatic 20% withholding is not required. However, it is subject to the regular withholding rules under Section 3405(a) for periodic payments and 3405(B) for non-periodic payments. If this qualifies as a periodic payment, then you would treat the distribution as if it were wages and use the appropriate tax table. If a participant does not complete the W-4P, then you withhold using married and 3 exemptions. If it is not a periodic payment, then you withhold at the old 10% rate.

I'd be interested in hearing an answer from the leasing company's perspective - interesting question. I'm sure someone has worked through this as these arrangements are becoming more popular.

I agree with MWeddell. If the M/P is clean from a document standpoint and the admin, then the cost of restating is much less than going through a termination/merger. You would need to comply with the 15 day 204(h) notice to convert the M/P into a 401(k) plan.

I have not resolved all of the issues you are asking, so I may be of limited help here. Usually, the leasing company has a 401(k) plan that the "employees" of your client will be eligible to participate. Your client is not a co-sponsor, but just gets billed for any matching contribution, etc., depending on the arrangement. In the cases I have seen, I find out this stuff after the've already done this so you have no chance to plan. You are going to run into the sucessor plan issue on 401(k) distributions if the plan is not handled correctly. The leasing company usually will not want to merge your client's plan into their plan for obvious liability reasons. Terminating the plan prior to any takeover by the leasing company may prevent this - however, it should be looked at carefully, as this is a land mine! Any other thoughts out there?

I don't have a cite, but you would have to pass the non-discrimination tests under 401(a)(4) as a benefit right or feature. I'm too brain dead to quote why, but I know prototypes cannot have the feature you are describing.

Without knowing the exact language you used (and that is real important!), my first reaction is that you could challenge the agent's thinking, in a nice way of course. If you have language that allocates a discretionary amount to each class of employees and the 415 limit kicks in, then how could that violate anything? One other method that I have seen is to incorporate language in your allocation formula to only allocate up to the 415 limit for each person and the remainder of the contribution would be spread among the other participants in the class. If you are using a prototype sponsor like PPD, Corbel, Datair, etc. as your basis for the document, you might check with them for some standard language that will do what you want. Hope that helps.

No disrespect, Chip, but I beg to differ with your opinion. The top heavy rules give guidance as to what happens when a plan goes from a 7 year graded schedule to a 6 year top heavy schedule, thus the basis for my answer. FINAL-REG, PEN-FINAL-REG, §1.416-1. Questions and answers on top-heavy plans T-43 Q. What happens to an individual who has ceased employment before a plan becomes top-heavy? A. If an individual has ceased employment before a plan becomes top-heavy, such individual would not be required to receive any additional benefit accruals, contributions, or vesting, unless the individual returned to employment with the employer. FINAL-REG, PEN-FINAL-REG, §1.416-1. Questions and answers on top-heavy plans V-3 Q. What benefits must be subject to the minimum vesting schedule of section 416(b)? A. All accrued benefits within the meaning of section 411(a)(7) must be subject to the minimum vesting schedule. These accrued benefits include benefits accrued before the effective date of section 416 and benefits accrued before a plan becomes top-heavy. However, when a plan becomes top-heavy, the accrued benefits of any employee who does not have an hour of service after the plan becomes top-heavy are not required to be subject to the minimum vesting schedule. Accrued benefits which have been forfeited before a plan becomes top-heavy need not vest when a plan becomes top-heavy. **** In dlm's example, the vesting would apply to anyone with an hour of service after 1-1-98, the effective date of the change. You are correct in your termination scenario that a participant who has not been cashed out will receive full vesting - and I hear complaints about that from plan sponsors every time!

Check the bowels of your plan document. There should be a paragrpah buried in there on changes in vesting. Generally most vesting schedule changes (either way) apply to participants with one hour of service after the effective date of the change.

This is one of those issues where I can argue one side and then turn around and argue the other side. In the situation where you have a plan document with two related employers (basically the same owner) and one employer fails to sign a participation agreement, but has made contributions to the plan, has anyone run this by the IRS on a John Doe basis? Certainly, innocent participants would be harmed, but I can make the argument that since the employer failed to sign, the plan was never in place. Certainly the debate would be whether to use Walk-in Cap or self-correct and play the audit lottery. Any comments?

Technically, there's no such thing as a prototype for tiered plans since they are treated as individually designed plans for IRS. However, most document providers, such as PPD, Datair, Corbel, etc., can provide you with a document that looks and feels like a prototype. I don't know exactly your situation, so you may wish to search this site elsewhere to look at advertisers who can provide you with a document if you are looking for a document for your clients. If you are looking to set one up for your company for its plan, there should be many administrative firms in your area who can help you with this. I hope this helps.

Recent legislation (IRS Restructuring & Reform Act of 1998) indicated that Roth distributions are now subject to early distribution penalty if distributed within 5 years. You might do a search elsewhere at this website to review the details of this. [This message has been edited by Ervin Barham (edited 04-23-99).]

Based on my information, the answer would be yes for 1998. The top heavy minimum is made on behalf of non-key employees who are eligible to defer compensation (even if they don't defer). For purposes of the top heavy rules, 401(k) contributions are counted as employer contributions. Also, a key employee's deferral is taken into account in determining if any key employee receives at least 3%. Editorial opinion - whether I like or agree with this rule is a whole 'nother subject and my soapbox is closed today.

Hmm, can a pension person be persuaded to change his mind? After reading Dan's answer, I could be persuaded to read it that way. I was coming at this only from the attribution standpoint- my apologies for sleepwalking.

A 401(k) plan can be established with deferrals as the only source of contributions. The Employer can have discretion whether to match or make any other type of contribution. However, if the plan becomes top-heavy, an Employer may be required to contribute a minimum of 3% of compensation for all non-key employees. A good question to ask the Employer is why they want to establish a 401(k) plan. The answer will go a long way to making that call. As a rule, most Employers will provide some sort of matching, even if it's discretionary. Also: (1) Will the employees participate if the employer does not contribute? (2) Are the key employees going to contribute? (3) Is the company profitable enough to make a contribution? With a little research, you should be able to find a good article that talks about this. If you have access to a tax service like CCH or RIA, you may find some good material to use. Good luck.

Generally, yes. See Code Section 416(i)(1)(B)(iii).

Employer A owns several subsidiaries, none of which are covered under A's plan. Not surprisingly, even after throwing out several acquisitions under the transition rule and checking all of the eligibility rules, the plan doesn't pass coverage under the 401(k)portion or the match portion. Any thoughts as to correction methods (still within 9 1/2 month period)? I have not tried (yet) any average benefits or non-discriminatory classification testing. Thanks.

Don't mix/confuse the two entities. The corporation's plans can be contributed to solely based on the W-2 issued by the corp. Check your plan document in case a slightly different definition of comp. other than W-2 is used. Schedule C income (earned income) is solely for the sole proprietorship and doesn't come into play in the corporation's plan. The corporation's contribution was due March 15, unless an extension was obtained. In addition, you need to check both plans and the SEP/IRA to insure that the Section 415 limits (25% or $30,000) are not exceeded. Since it is hard to provide anything specific without further facts, you might check with a good accountant or benefits person in your area for help with this one.

Unless I'm missing something here, this is a tax matter, not a pension matter. An accountant type person should be handling the return issue. As long as the corporation obtained a properly filed extension, there should not be a problem with any sort of deduction as long as the contribution was made within the time limits. If I'm off base, I'm sure someone will set me straight. Code Section 404 and the related regs deal with this issue. I would suggest that you search those regs elsewhere in this site for help. However, since I am not an accountant, I strongly suggest you get in touch with one!

In general, the plan can be continued by having the corporation adopt the plan of a sole proprietor. However, I don't think you can retroactively go back to 1998 as the corporation must have adopted the plan by the calendar year end to make a contribution for 1998. I'm not a legal expert, however. Check also with your prototype document provider. They should be able to give you some guidance.

Yep.

Other than the fact that almost everyone of these "options geniuses" has lost their shirts on these things? I have been dealing with segregated accounts since 1980something and this comes up once a year or so. Not to be construed as investment advice, of course, but common sense could apply here. However, options, puts/calls, etc., are not prohibited. Check the plan document carefully! Some plans may allow this, some may not. That may be your out or as you have already stated - you may not want to handle that kind of business. You also need to watch out if they want to use margin accounts to try to do this, since you may run afoul of the Unrelated Business Income Tax in the debt related financing area. Summary: Lots of potential pitfalls, but not necessarily illegal, depending on the plan document.

I'm in the middle of calculating earnings on a QDRO right now. I agree with LCarusi in that the plan cannot reject a valid QDRO and should calculate earnings. It can also be difficult to calculate! However, if at all possible, since this is a matter of negotiation between the attorneys for both spouses, they should work with the recordkeeper to make sure that the dates, methodology, etc., can be handled by the recordkeeper and also reflects a true and proper allocation of earnings, contributions, and loans to each party. Sometimes the date chosen is the date of separation, for example and the plan has no value as of that date since it was providing only quarterly valuations is one example that I can think of.

Not that I'm aware.

I had this question come up several years ago. For purposes of retirement calculation (all of them), you would only use the W-2 income. Since most plans (at least the ones I'm familiar with) define comp as "earned income", the dividend would not count since that is not considered earned income. I can't really answer your question on amending the comp definition, but somehow I don't think that is possible. I don't have a cite. And no, it doesn't matter if this is an LLC or partnership. Both are treated for plan purposes as a partnership.

Al: Time to take a measure of the ol' stress level???? Having been there many times in the exact same situations you describe, I certainly empathize. Which is also why I'm now a consultant. Good luck this year!